Dividend 15 Split Corp T.DFN

Rounding

[Marner16]

It appears that the NAV calculations are very sensitive to the cash position. 

My spreadsheet calculates to 3 decimal points and when it summed the share holdings, the math came out to 89.6% and generated a NAV of $15.31

When I input the 11% cash position provided by Quadravest, it generated a NAV of $15.40 in my spreadsheet, which is what they published this afternoon.  I learned something, which is to use the cash position percentage offered by Quadravest despite the fact that the holdings percentages they provided don't round off to an even number.

Trying to predict an exact value is a bit of a mug's game because:

1) we don't ever get to know the actual cash position at any time other than when it is provided in the annual financial statement 

2) we don't know the actual percentages of holdings at any time other than when it is provided 4x per year

3) I haven't gotten around yet to determining the impact on the NAV of the timing of receiving dividends and covered call option premiums.....in the short run it is significant, but in the long run doesn't matter

My son took a look today at the track record over the past 31 months of the DFN.A share price for the 5 trading days before and the 5 trading days after the ex-dividend date.  What he found is that the optimum trading days result from selling the last day of trading before the ex-dividend date, and buying back two days after the ex-dividend date.  He found that over time, the market is quite efficient as the best universal timing generated a $0.149 return vs $0.145 for the actual payout.  He also found that December is an outlier and when he removed the month of December from the average, the return was $0.162. 

My son is going to look at one more factor, which is the timing of the sells and buys.  He will be able to determine, on average, what is the best time of day to buy and sell on the specific target days. I suspect that actual timing to the closest hour will move the needle a lttle more. 

For institutional investors, the above is useless information as they typically buy and hold for significant periods of time.  For small investors like us, what it means is that if you play the game without thinking, as in just rinse and repeat each month other than just accepting the dividend in December, you can pick up 11 x $0.162 + 1 x $0.10 = $1.88 per share each year versus $1.20 in a buy and hold strategy.  The strategy is manageable for punters because the volumes are big enough to accomodate moving in and out of the stock for little guys. 

For anyone holding DFN for income purposes, the above strategy should increase your annual income for the investment by 50% less trading fees.  If you are going to use the strategy, you will benefit from using a low cost trading platform and you will benefit from larger volume trades.  Brokers that charge high fees would never offer this type of strategy as their fees would eat up the profits.

It is imprortant to understand the risk in owning an investment like DFN.  They pay out an unsustainable amount of dividend each month  on the DFN.A shares versus what they recover in the form of dividends and call premiums.  While the lower payout of the preferreds helps the return of the DFN.A holders via leverage, it is not enough to compensate for the monthly $0.10 payout.  As such, DFN.A holders must rely upon the share price expansion of the underlying securities in the fund to offset the ongoing deterioration of the NAV.  The historical pattern of NAV depreciation is evident in the fact that the original NAV at the time of the offering memorandum was $25.00 while it was $15.30 on December 30, 2020.

[mouserman]

Hey Marner, Quadravest does provide a monthly update, and it should be out in a few days. It does provide the cash position at month end.  You can see November's , which was 11%...

[Crazydavid]

Both you Marner and Mouserman are a great help to us. Thank you